Portland Investment Counsel Inc.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- One-time transfer of portfolio securities between two pooled funds and one-time transfers of portfolio securities between two future pooled mutual funds, both advised by the same portfolio adviser, to implement a merger between the funds -- Funds have substantially similar investment objectives and strategies, fees and valuation policies -- Costs of the merger borne by manager -- Sale of securities exempt from the self-dealing prohibition in paragraph s.13.5(2)(b)(iii), National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Applicable Legislative Provisions
National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(b)(iii) and s. 15.1.
July 3, 2020
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF PORTLAND INVESTMENT COUNSEL INC. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds (defined below) for a decision under the securities legislation of the Jurisdiction (the Legislation) from subparagraph 13.5(2)(b)(iii) of National Instrument 31-103 Registration Requirements Exemptions and Ongoing Registrant Obligations (NI 31-103) to permit the Filer to effect the Current Merger of the Current Terminating Fund into the Current Continuing Fund, and any other merger of a Terminating Fund into a Continuing Fund (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
1. The Ontario Securities Commission is the principal regulator for this application; and
2. The Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (together with Ontario, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms shall have the following meanings:
Continuing Fund means the Current Continuing Fund or any pooled mutual fund managed by the Filer into which a Terminating Fund is merging as part of a Merger;
Current Continuing Fund means the Portland Special Opportunities Fund;
Current Funds means the Current Continuing Fund and the Current Terminating Fund;
Current Merger means the merger of the Current Terminating Fund into the Current Continuing Fund;
Current Terminating Fund means the Portland Value Plus Fund;
Final Redemption Date means the last date on which unitholders of a Terminating Fund will be able to redeem their units prior to a Merger;
Fund or Funds means, individually or collectively, a Terminating Fund and/or a Continuing Fund;
IRC means the independent review committee for a Fund;
Merger means the merger of a Terminating Fund into a Continuing Fund;
Terminating Fund means the Current Terminating Fund or any pooled mutual fund managed by the Filer that is merging into a Continuing Fund as part of a Merger.
Representations
This decision is based on the following facts represented by the Filer:
The Filer and the Funds
1. The Filer is a corporation incorporated under the laws of Ontario. The Filer is registered as:
a. in the provinces of Alberta, Newfoundland and Labrador, Ontario and Quebec in the category of investment fund manager;
b. in each of the provinces and territories of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Ontario, Prince Edward Island, Quebec and Saskatchewan as an adviser in the category of portfolio manager;
c. in each of the provinces and territories of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec and Saskatchewan as a dealer in the category of exempt market dealer; and
d. in Ontario as a dealer in the category of mutual fund dealer.
2. The Filer is the manager of each Fund.
3. The Funds are not reporting issuers in any jurisdiction and are not subject to National Instrument 81-102 Investment Funds.
4. Each Fund offers its units pursuant to available prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions.
5. Neither the Filer nor either of the Funds are in default of the securities legislation (the Legislation) in any of the Jurisdictions.
Reason for Requested Approval
6. The sale of the assets of a Terminating Fund to a Continuing Fund (and the corresponding purchase of such assets by the Continuing Fund) as a step in the Merger may be considered a purchase or sale of securities, knowingly caused by a registered adviser that manages the investment portfolios of both Funds, from the Terminating Fund to, or by the Continuing Fund from, an investment fund for which a "responsible person" acts as an adviser, contrary to subparagraph 13.5(2)(b)(iii) of NI 31-103.
7. Unless the Exemption Sought is granted, the Filer would be prohibited from knowingly causing the portfolio securities and other assets of the Terminating Fund to be transferred to the Continuing Fund in connection with the Merger.
8. The portfolio securities and other assets of the Terminating Fund will be transferred from the Terminating Fund to the Continuing Fund in accordance with the steps described below. Since the transfer of portfolio securities and other assets will take place at a value determined by common valuation procedures and the issue of units will be based upon the relative net asset value of the portfolio securities and other assets received by the Continuing Fund, and notice and redemption rights will be provided to unitholders, it is the Filer's submission that any potential conflict of interest has been adequately addressed.
The Proposed Mergers
9. The Filer intends to merge a Terminating Fund into a Continuing Fund.
10. Although the Funds are not subject to the requirements of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), the Filer presented, or will present, the terms of the Merger to the independent review committee of the Funds (the IRC) for its review. The IRC determined, or will determine, that the Merger, if implemented, will achieve a fair and reasonable result for each of the Funds.
11. Unitholders of the Current Terminating Fund will be provided at least 25 days' written notice of the Current Merger prior to the Final Redemption Date after which the Filer, in its capacity as manager of the Current Terminating Fund, may effect the Current Merger. Other than in the case of the Current Merger, unitholders of a Terminating Fund will be provided at least 30 days' written notice of the Merger prior to the Final Redemption Date. The notice for each Merger will include a description of the Continuing Fund and outline any material differences between the Terminating Fund and the Continuing Fund.
12. If the Exemption Sought is granted, the Current Merger is currently scheduled to occur after the close of business on or about July 31, 2020 (the Effective Date). The Filer, therefore, anticipates that each unitholder of the Current Terminating Fund will become a unitholder of the Current Continuing Fund after the close of business on the Effective Date. The Current Terminating Fund will be wound-up as soon as reasonably possible following the Merger.
13. The costs of effecting each Merger (consisting primarily of legal and regulatory fees, charges by the administrator and printing and mailing costs) will be borne by the Filer.
14. No redemption fees, other fees or commissions will be payable by the Funds' unitholders in connection with each Merger. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the Terminating Fund's investment portfolio.
15. Securities of the Continuing Fund received by unitholders of the Terminating Fund as a result of the Merger will have the same sales charge option as their securities in the Terminating Fund.
16. Unitholders of the Current Terminating Fund will have the right to redeem their securities of the Current Terminating Fund at NAV on the Effective Date. Unitholders of a Terminating Fund, other than the Current Terminating Fund, will have the right to redeem their securities of the Terminating Fund at NAV on the Final Redemption Date.
17. The portfolio of assets of the Terminating Fund to be acquired by the Continuing Fund arising from each Merger will be consistent with the investment objectives of the Continuing Fund.
18. The NAV of each of the Funds is determined using substantially similar valuation principles.
19. The assets of the Funds will be valued in accordance with the valuation policies and procedures outlined in the declaration of trust of each Fund, and, at this value, the assets of the Terminating Fund will subsequently be exchanged for units of the Continuing Fund as described above.
20. The transfer of the assets of the Terminating Fund to the Continuing Fund will not materially adversely impact the liquidity of the Continuing Fund.
21. Unitholders of the Terminating Fund will not be subject to the redemption fee applicable to unitholders of the Continuing Fund.
Merger Steps
22. The steps to implement each Merger are as follows:
a. Prior to the Merger, if required, the Terminating Fund will sell any securities in its portfolio that do not meet the investment objective and investment strategies of the Continuing Fund. As a result, the Terminating Fund may temporarily hold cash or money market instruments and may not be fully invested for a brief period of time prior to the Merger being effected.
b. The value of the Terminating Fund's investment portfolio and other assets will be determined at the close of business on the Effective Date in accordance with the constating documents of the Terminating Fund.
c. It is expected that the Merger will occur on a taxable basis. Unitholders in cash accounts may be subject to taxable gains or losses.
d. The Terminating Fund will transfer substantially all of its assets to the Continuing Fund which will consist of cash and portfolio securities, less an amount required to satisfy the liabilities of the Terminating Fund. In return, the Continuing Fund will issue to the Terminating Fund units of the Continuing Fund having an aggregate net asset value equal to the value of the assets transferred to the Continuing Fund.
e. The Continuing Fund will not assume liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the Effective Date.
f. Immediately thereafter, units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund in exchange for their securities in the Terminating Fund on a dollar-for-dollar and series-by-series basis.
g. The Terminating Fund will be wound-up as soon as practicable following the Merger.
23. The result of the Merger will be that investors in the Terminating Fund will cease to be unitholders of the Terminating Fund and will become unitholders of the Continuing Fund.
Benefits of the Current Merger
24. In the opinion of the Filer, the Current Merger will be in the best interests of unitholders of the Current Funds for the following reasons:
a. The Current Terminating Fund and Current Continuing Fund have activist investment strategies at their core with both holding EPSO4, a private activist fund;
b. The Current Merger has the potential to lower costs for unitholders as the operating costs of the Current Continuing Fund will be spread over a greater pool of assets after the Current Merger;
c. The Current Merger will result in unitholders of the Current Terminating Fund holding a series of units of the Current Continuing Fund that has lower management fees; and
d. The Filer will assume all costs of the Current Merger, and it is not expected that operating costs will change on the Current Continuing Fund because of the Current Merger.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:
a) the board of directors of the Filer determined that the Merger is in the best interests of the Funds and approved the Merger;
b) although the Funds will not be subject to the requirements of NI 81-107, the Filer presented the terms of the Merger to the IRC of the Funds for its review and the IRC determined that the Merger, if implemented, will achieve a fair and reasonable result for the Continuing Fund and Terminating Fund;
c) Other than in the case of the Current Merger in which unitholders of the Current Terminating Fund are provided with at least 25 days' written notice of the Merger prior to the Final Redemption Date, unitholders of a Terminating Fund are provided at least 30 days' written notice of the Merger prior to the Final Redemption Date. The notice for each Merger included a description of the Continuing Fund and outlined any material differences between the Terminating Fund and the Continuing Fund;
d) The costs of effecting the Merger are borne by the Filer;
e) No redemption fees, other fees or commissions are payable by a Fund's unitholders in connection with each Merger. No sales charges are payable in connection with the acquisition by the Continuing Fund of the Terminating Fund's investment portfolio;
f) Other than in the case of the Current Merger in which unitholders of the Current Terminating Fund have the right to redeem their securities at NAV on the Effective Date, unitholders of a Terminating Fund have a right to redeem their securities of the Terminating Fund at NAV on the Final Redemption Date;
g) The NAV of each of the Terminating Fund and the Continuing Fund is determined using substantially similar valuation principles; and
h) The assets of the Funds are valued in accordance with the valuation policies and procedures outlined in the declaration of trust of each Fund, and, at this value, the assets of the Terminating Fund are subsequently exchanged for units of the Continuing Fund.